Electronic Arts hopes for triple play

TimHaran

REDWOOD CITY, Calif. (CBS.MW) -- Video game maker Electronic Arts is in position to turn a triple play this fall.

That's because a trio of rivals will fight to be crowned champion of next-generation video gaming this year.

Sony, Nintendo and Microsoft are expected to pour more than $750 million into marketing their systems. That means that between now and Christmas the average consumer can expect to see about 100 ads pushing gaming, analysts said.

"When you have three manufacturers fighting for market share, it makes for a very loud Christmas in terms of advertising," said George Gilbert, co-portfolio manager of Northern Technology Fund. "If you're EA, you don't care who the platform winner is, you just want a high level of excitement and a lot of boxes to sell."

Electronic Arts
ERTS
which is developing games for the three major platforms, ended last year as the top publisher of PC games.

The company built its core business around the cyclical nature of sports. It's best known for a sports division that includes titles like Madden NFL, Triple Play Baseball and NBA Live.

EA generates repeat business by capitalizing on the ever-changing world of professional athletics. Mid-season trades and college drafts encourage gamers to shell out about $50 per title each season for updated rosters.

Added to that, the video game publisher's catalog includes the wildly popular Sims game and soon-to-be-released titles based on the Harry Potter books and James Bond movies.

"Our console business is going to be very exciting with fast growth," said EA Vice President Frank Gibeau. "Our strategy is to dominate on all lines."

EA's stock has jumped 34 percent this year, largely fueled by interest in new game systems. It hit a 52-week high on May 22.

The recent gains in EA's share price have factored in the success of the core business, but analysts said the company's online arm still has something to prove.

"I have to admit that the stock is increasingly getting to the point where it requires the success of the online gaming business," Gilbert said.

Net games

Although EA reported a $105.4 million profit in fiscal 2001 for its core business, the game publisher's online venture, EA.com, lost $99.4 million last year and isn't expected to break even until fiscal 2003.

"I think that at one million subscribers you can self-fund the underlying business. I'm assuming that they'd get some ad revenue from that as well," Gilbert said.

Justin Post, an analyst at Deutsche Banc Alex. Brown, said in an industry report that if the Internet advertising market rebounds, online and wireless gaming revenues could increase from $300 million today to $2 billion by 2004.

"EA.com has unique content," said Heath Terry, analyst at CS First Boston, who's set a $70 target price for the stock. "You can only play baseball online at EA.com and there is a demand for that."

The demand is such that consumers are paying to play. Post estimates EA.com will have 600,000 subscribers by early-2002. Ultima, EA's four-year-old online fantasy game, already has about 210,000 subscribers paying $10 per month. EA is also testing the subscription-model waters with a sports package that charges a monthly fee for "sports club" access.

EA is counting on revenues from subscriptions and advertising to make the online business profitable by fiscal 2003. Gilbert said one million subscribers paying $10 per month would make that happen.

"Online viability is a tough question for management," Gilbert said. "I suspect they'll give it current fiscal year (2002) and maybe a little more, but I think they'll tighten up on investments."

One test could come at the end of June when EA launches the much-hyped Majestic, an invasive online mystery game. Majestic players, paying $5 to $10 a month, will use clues sent unannounced via telephone, fax, e-mail and online to solve a mystery. A new "episode" will start about once a month, analysts said.

"If Majestic lives up to one-tenth of its hype, it will be a huge success," Terry said.

If Majestic doesn't net subscribers, analysts believe the 2002 launch of the online version of The Sims will.

"Majestic will be hit or miss," Post said. "I definitely think Sims will be a home run."

The Sims, a hugely popular simulation game for the PC that allows users to create and manage characters living on their computer screens, is set to launch online early next year. The PC version has sold seven million copies and analysts said that multi-player options make the game much more interesting.

EA has bet heavily on online gaming. In 1999 the software maker paid America Online $80 million to run the Internet service provider's game channel. Earlier this year EA bought low-tech game site Pogo.com. Post said, 1.6 percent of time spent online is spent at EA.com, making it one of the Internet's "stickiest" sites.

Investor concerns

Still, Gilbert said investors are skeptical of anything that ends in dot-com. Analysts are quick to defend the Web site: "It's such a different model," Terry said, emphasizing that players are willing to pay to play online video games.

Others see EA's reliance on the game system makers as a significant drawback, citing last year's PS2 snafu where Sony couldn't keep the season's hottest toy on shelves. Post said the flub cost EA $100 million. Not to mention that Sony and Nintendo, which also develop video games, are EA's most significant competitors, Gibeau said.

Another concern is simple economics. Should a sluggish economy weigh on consumers during the crucial holiday shopping season it may not matter how much money is spent on advertising.

Company officials counter that they're somewhat protected by the spread of platforms they write for. "If there's a significant drop in certain platforms, we're able to compensate for that with our PC business," said Gibeau.

"I'm inclined to say that the stock probably doesn't have a huge amount of downside unless something happens to disrupt the platform cycle this year, such as Microsoft delaying Xbox," Gilbert said.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.